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Given the credit crunch and real estate free-fall of the last two years, a no-down-payment mortgage sounds anachronistic, if not downright unbelievable.
But the fact is that thousands of Americans can still purchase a home with no money down, and they don't have to be veterans or military members.
The U.S. Department of Agriculture runs a guaranteed loan program that helps consumers secure affordable financing in more rural parts of the country. The USDA loan program has proved a powerful lifeline for borrowers who might otherwise struggle to become homeowners. (See also: The Different Types of Loans: A Primer)
What is a USDA Home Loan?
A USDA loan is government-backed loan provided to borrowers through the agency's Rural Development program. The loan comes in two varieties — the Guaranteed Loan and the Direct Loan for lower-income households.
The program features flexible credit and income requirements. Borrowers are able to maximize their purchasing power and find competitive rates and loan terms, in part due to the government guarantee that pledges to reimburse lenders in the event of default. Other major benefits of USDA loans include:
- No mortgage insurance required
- No purchase limit
- Competitive 30-year fixed interest rates
Who Is Eligible?
"Rural" can be a misleading term. Borrowers don't have to purchase light years from urban centers. In addition to rural real estate, many qualified USDA homes are within city limits and are usually located in developing areas of the city. This diversity allows potential borrowers a great opportunity to secure a home inside or outside of city limits without high out-of-pocket expenses.
USDA home loans are relatively easy to qualify for. In fact, most borrowers who secure a USDA loan would not have been able to secure a conventional loan due to the strict eligibility requirements conventional loans place on lenders. The USDA home loan program even has a loan, the USDA Direct Loan, to help lower-income households secure financing. To initially qualify for a USDA home loan, potential borrowers must have an income no greater than 115% of the median income for the area and be able to afford the monthly mortgage payments including taxes and insurance.
Although USDA home loans do have flexible eligibility requirements, most USDA-approved lenders will require a mid-range credit score of at least 620 to secure financing.
If potential borrowers doubt their eligibility for a USDA loan, they are still encouraged to apply as those with a history of bankruptcy or foreclosure have qualified in the past.
Veterans and active-duty service members can certainly qualify for USDA loans, but they have access to their own powerful, no-down payment program: The VA Loan Guaranty program.
